Why do early stage investors stay glued to their domestic markets?
This is a question that we come across from so many entrepreneurs, especially those that are located in remote regions of Europe, which are not easily accessible from a major metropolis. Likewise the same question arose from the numerous Indian tech entrepreneurs that we recently met during The Chilli’s research trip in India.
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Different regions and parts of the world invariably have different legislations and regulation regarding the process of fund raising, due diligence practices, rights regarding minority shareholders, exit clauses, restriction and regulations on foreign investors, and so on.
A HNWI or an angel investor would prefer to work in an environment where they have sufficient knowledge regarding the issues raised above. Secondly, and more importantly, early stage investors, including VCs, like to add a lot of value to their investee company, other than pure financial capital. They like to bring in their network of contacts, potential partners, recruiters, bankers and key customers.
They can only do this in a region in which they have familiarity with business practices and some working knowledge of the local regulations. On the practical side, most early stage investors like to keep a close eye on their investments via regular meetings with the management of the start-up company.
They do this by regular attendance of the company's board meetings, as well as informal meetings with the management. This is much easier to do if it takes you less than two hours to get there. It used to be two hours driving distance, but this has now been extended to two hours flying distance.
Cheap flights changes the investment picture
We know of one angel investor, who resides in South of France, where he has invested in a start-up company in Liverpool, no doubt assisted by regular, cheap flights from Nice to Liverpool. The investor could attend a meeting with an early-morning flight and could be back home by dinner time.
Conversely, if the entrepreneur needs to urgently get hold of the investor for some signing off process, they could easily reach the investor. In choosing this strategy, the investor is able to provide better service to its portfolio companies, as having a long distance portfolio company would eat into a disproportionate amount of their time, which would affect the rest of the portfolio.
That is why larger, more established VCs seek out local partners who add local knowledge. Some VCs can go a step further and set up their own offices in the given region, both to support their domestic portfolio companies expand abroad, and also seek new investment opportunities locally.
Diasporas have a different mode of risk assessment
Having said that, there are always exceptions, especially when it comes to the different global villages populated by various ethnic or regional diasporas. It is not uncommon to have east coast US investors investing in an Israeli company, based on their network of advisers and contacts. Likewise, it is also very common, for west coast and Texas based NRIs ( non-resident Indians) investors to invest in Indian technology start-ups, as they are already familiar with the local business practices, networks and opportunities, having once experienced it themselves.
The same goes for the Taiwanese and Chinese, investing in Taiwanese and now increasingly Chinese start-ups.
This has given rise to a totally new type of start-up company, namely hybrids and global in nature from day one. A lot of the technology start-up companies we come across in our Indian research trip have their principal investor, CEO and head office in the U.S. silicon valley, while the vast majority of the engineering and operations are located in either Bangalore or Hyderabad.
So the advice for those entrepreneur is in Wales, Scotland, Ireland, Sweden, Norway, Hungary, Slovenia, Poland, is to seek out regions of the world, where their own diaspora are located in sufficient numbers. After all, most people who have done well, always want to put something back into the system which gave them that early start and hunger for success.
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